OPEC’s decision to cede no ground to rival producers underscored the
price war in the crude market and the challenge to U.S. shale drillers.

The
12-nation Organization of Petroleum Exporting Countries kept its output
target unchanged even after the steepest slump in oil prices since the
global recession, prompting speculation it has abandoned its role as a
swing producer. Yesterday’s decision in Vienna propelled futures to the
lowest since 2010, a level that means some shale projects may lose
money.

“We are entering a new era for oil prices, where the market itself will manage supply, no longer Saudi Arabia and OPEC,” said Mike Wittner, the head of oil research at Societe Generale SA in New York. “It’s huge. This is a signal that they’re throwing in the towel. The markets have changed for many years to come.”

The fracking boom has driven U.S. output to the highest in three decades, contributing to a global surplus that Venezuela
yesterday estimated at 2 million barrels a day, more than the
production of five OPEC members.

Demand for the group’s crude will fall
every year until 2017 as U.S. supply expands, eroding its share of the
global market to the lowest in more than a quarter century, according to
the group’s own estimates.

Photographer: Eddie Seal/Bloomberg

Floor hands on the Orion Perseus drilling rig near Encinal in Webb County, Texas.

Benchmark Brent crude fell the most in more than three years
after OPEC’s decision, sliding 6.7 percent to close at $72.58 a barrel.
Futures for January settlement sank to $70.15 today, the lowest close
since May 2010. Prices peaked this year at $115.71 in June.

Market Signals

“We
will produce 30 million barrels a day for the next 6 months, and we
will watch to see how the market behaves,” OPEC Secretary-General
Abdalla El-Badri told reporters in Vienna after the meeting. “We are not
sending any signals to anybody, we just try to have a fair price.”

OPEC
pumped 30.56 million barrels a day in November and has exceeded its
current output ceiling in all but four of the 34 months since it was
implemented, according to data compiled by Bloomberg. OPEC’s own
analysts estimate production was 30.25 million last month, according to a
report Nov. 12. Members will abide by the 30 million barrel-a-day
target, El-Badri said yesterday.

“OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said yesterday by phone. “It wouldn’t be surprising if Brent starts testing $70.”

Conventional Producers

Conventional
oil producers in OPEC can no longer dictate prices, United Arab
Emirates Energy Minister Suhail Al-Mazrouei said in an interview in
Vienna on Nov. 26. Newcomers to the market who have the highest costs
and created the glut should be the ones to determine the price, he said.

“That is what OPEC is hoping for,” Carsten Fritsch, a commodity analyst at Commerzbank AG in Frankfurt, said in an e-mail. “It’s the question of who will blink first.”

OPEC
may now be prepared to let prices fall to force some drillers with
higher production costs to stop pumping, said Julian Lee, an oil
strategist who writes for Bloomberg First Word and has worked in the
industry for 25 years. That scenario would mark the start of a fourth
oil-market era since the end of the 1970s, he said.

Fourth Era

Since
the early 2000s, surging demand growth drove up prices allowing
companies to apply new extraction techniques and develop deep-water and
other costly oil. That ended an era that pervaded since the mid 1980s,
which was characterized by low prices and OPEC regaining the market
share that it had previously sacrificed in an attempt to preserve high
prices, Lee said.

OPEC will face pressure too, with prices now below the level needed by nine member states to balance their budgets, according to data compiled by Bloomberg.

“They
haven’t taken collective action,” Richard Mallinson, an oil analyst at
London-based Energy Aspects Ltd., said by phone. “That doesn’t mean they
won’t do it in the next few months if prices stay low.”

U.S. Production

U.S.
oil production has risen to 9.077 million barrels a day, the highest
level in weekly data from the Energy Information Administration going
back to 1983. Output will climb to 9.4 million next year, the most since
1972, it forecasts.

Middle Eastern exporters including Saudi Arabia, Iran and Iraq
can break even on a cost basis at about $30 a barrel, Sanford C.
Bernstein & Co. They need more to balance their budgets. Some U.S.
producers need more than $80, the consulting firm said in a report last
month.

OPEC’s policy will spur a crash in the U.S. shale industry, Leonid Fedun, a vice president and board member at OAO Lukoil, Russia’s second-largest oil producer, said in an interview in London before the group’s decision.

“In
2016, when OPEC completes this objective of cleaning up the American
marginal market, the oil price will start growing again,” said Fedun.
“The shale boom is on a par with the dot-com boom. The strong players
will remain, the weak ones will vanish.”

The share prices of
U.S. oil producers including Exxon Mobil Corp. and Chevron Corp. fell by
at least 4 percent in New York trading today.

No Cut

Igor Sechin, the chief executive officer of OAO Rosneft, Russia’s largest oil producer, said after a meeting with Venezuela, Saudi Arabia and Mexico that his nation wouldn’t need to cut output even if prices fell below $60.

“The question is, what price level will be low enough to slow U.S. production growth?” Torbjoern Kjus, an analyst at DNB ASA, Norway’s
biggest bank, said by phone. “What price will get U.S. growth to slow
to 500,000 barrels a day from this year’s rate of 1.4 million barrels?”

Only about 4 percent of U.S. shale production needs $80 or more to be profitable, according to the Paris-based International Energy Agency.
Most production in the Bakken formation, one of the main drivers of
shale oil output, remains profitable at or below $42 a barrel, the IEA
estimates. The agency expects U.S. supply to rise by almost 1 million
barrels a day next year, with increasing flows to international markets.

OPEC has gone “cold turkey” on balancing the oil market,
Goldman Sachs Group Inc. said in a report yesterday. Prices may have
further to fall until there is evidence of U.S. production slowing,
according to the bank. It said last month that oil markets were entering
a “new oil order,” with OPEC retreating from its role as a swing
producer.

“OPEC’s decision means it is over to you America,”
Miswin Mahesh, a London-based commodities analyst at Barclays Plc, said
in an e-mail. “This opens the window for the U.S. to be the new swing producer.”

Source: Bloomberg

The perils of cheaper oil

COME Dec 1, Malaysia will enter a new era long desired by the advocates of free market.

The pump price of petrol and diesel at the kiosk will be based on a managed float system depending on global oil prices. This will replace the current system where the Government fixes the price at the pump, a process that involves a huge amount of subsidy.

For years, the Government adopted the fixed price mechanism because it brought about an element of stability.

Unlike most other countries where the price at the pump varies from day to day, Malaysians are used to planning their expenditure based on a fixed price.

Right from a typical consumer to large companies, they all depend on oil or some form of energy to carry out their daily lives or operations. The fixed price has helped in their planning.

But the biggest disadvantage of having a fixed price for oil is that it involves a huge amount of subsidy, especially in an environment where oil prices go beyond what is anticipated by the Government.

Malaysia’s tale of subsidy woes is a subject matter that is often spoken about.

The subsidy bill is estimated at about 14% of the Government’s total operating expenditure of RM271.94bil for next year. The bulk of the RM38bil that has been set aside for next year is to ensure that the fuel cost remains stable.

There is a sales tax of 58 sen per litre on petrol sold at the pump. But the mechanism to collect the tax has not kicked in because the subsidy per litre is much higher than the sales tax.

Beginning July this year, the oil and gas dynamics changed with the United States becoming a large producer, thanks to the shale oil and gas.

The implications of the shale oil and gas on the global economy are huge. It has gone beyond the oil and gas industry. Oil-dependent nations such as Iran, Iraq and Venezuela are in trouble because a low oil price means less revenue and less money to fund their development programmes and, more importantly, to pay off their debts.

Venezuela is high on the list of countries that could seek some reprieve from bondholders because it needs oil price to be more than US$160 per barrel to balance its budget.

The Russian rouble has depreciated by more than 45% against the dollar and state-owned Rosneft has seen its profit almost collapse due to the depreciating currency.

Russia’s problems have exacerbated the slowdown in Germany, the strongest economy in Europe and this has in turn affected the entire eurozone recovery.

As for Asia, the best thing that the low oil prices have brought about is an era of low inflation and allowed some governments to carry out their reforms of energy policies. It has allowed governments to dismantle the subsidy system that has for long artificially kept the cost of production low.

Indonesia removed subsidies last week, a move that was cheered by foreign investors, because the system apparently only benefited a handful of powerful businessmen.

For Malaysia, when global oil prices are less than US$80 per barrel, which is the case now, there is no more subsidy for petrol and diesel sold at the pump. What kicks in is the sales tax of 58 sen per litre.

Come April 1 next year, the sales tax will be replaced with a goods and services tax of 6%. What this means is prices at the pump will be substantially lower than what they are today – provided global oil prices remain at less than US$80 per barrel.

Theoretically, this should translate into Malaysia having a lower cost of production due to cheaper energy prices. When oil prices went up over the past years, wages and all other costs followed suit. When the reverse happens, shouldn’t the cost of production come down?

Unfortunately that is not the case. The US is benefiting from the low energy cost era, at the expense of Asia. In fact, Asia as a whole may be losing out as a result of the steep fall in global energy prices.

Since the 1980s, Asian countries have been the destination for foreign manufacturers from the Europe and the US to relocate their operations because of the cheap cost of labour.

But manufacturers increasingly are paying more attention to destinations with low energy cost. Cheaper cost of energy is seen as an adequate substitute for low wages.

European manufacturers have turned to the US, where the cost of natural gas is one-third that of South-East Asia, to relocate their operations.

BASF, the large German chemical company, is planning to build a US$1.4bil plant in the Gulf Coast, apart from increasing its annual capital expenditure of US$20bil into that country.

An Austrian steel company, Voestalpine, is building a US$500mil facility in Texas to export iron for its steel plants. It will use natural gas to blast the furnace instead of coking coal in Europe.

Previously, these companies would make Asia their destination because of its low cost of production.

The flow of new manufacturing investments to the US is also assisted by the low rise in wages there compared with Asia. According to a report, between 2006 and 2011, Asian wages rose by 5.7% compared with only 0.4% in developed countries.

For decades the big gap in the wage rate increases between Europe, the US and countries such as Malaysia determined the flow of foreign investments. But now that is no longer the case.

Malaysia has to raise productivity or it will lose out on attracting new investments. Low wages alone will not do, especially now when prices of oil and gas resources are in a tailspin.

By M.SHANMUGAM The Star/Asia News Network

Petronas cuts capex

PETROLIAM Nasional Bhd’s (Petronas) announcement of its third-quarter results comes at a delicate time, considering that it is being watched by all and sundry.

Petronas president and CEO Tan Sri Shamsul Azhar Abbas

Amidst a scenario of a free-fall of oil prices and the politically-charged Umno General Assembly, it comes as no surprise that Tan Sri Shamsul Azhar Abbas (pic), the oil major’s president and chief executive, says he has to be “politically correct” in delivering his key message.

At a press conference yesterday, Shamsul also explained that Petronas had waited for the all-important Organisation of the Petroleum Exporting Countries (Opec) meeting to conclude before addressing the media in Kuala Lumpur.

And rightly so

The 12-member Opec decided on Thursday not to lower its output target, leading to oil prices plunging by a further 8% on Friday, cumulating in an almost 40% dip since mid-June.

The Brent crude oil price is now at US$72.84 per barrel and some forecasters are predicting that oil prices could hit US$60 per barrel.

Petronas itself is now predicting that oil prices could settle at US$70-US$75 next year.

This is a far cry from the US$108 per barrel that Petronas had averaged last year and the US$106 per barrel, which is the average price of the Brent crude for the first nine months of this year.

Shamsul lays out the bare truth on what the falling oil prices would mean for Petronas, the oil and gas (O&G) services industry and the federal government’s coffers:

Capital expenditure (capex) on the O&G industry will be cut by between 15% and 20%

Petronas’ contribution to Government coffers in the form of dividends, taxes and oil royalty for next year will dive by 37% to RM43bil, assuming the Brent crude settles at US$75 per barrel;

Petronas will not proceed with contracts to award new marginal oil fields unless oil settles at levels above US$80 per barrel

Projects in Pengerang that have yet to receive the final investment decision (FID) will be affected by the cut-backs. Projects worth US$27bil that have received FID will not be affected, but Petronas does not have 100% equity in all the projects approved.

The capex crunch is expected to send chills down the spine of the already fragile O&G sector, with the stock prices of listed players already haemorrhaging in light of the free-fall of oil prices.

Apart from the 40-odd listed O&G companies, there are close to 4,000 other smaller companies that depend on Petronas for O&G service jobs.

“Nearly all depend on Petronas for jobs,” says an official in the O&G industry.

The capex cut by the national oil company is likely to have a negative impact on these companies and runs contrary to what research houses have been projecting.

Global slide

Several research houses have been stating that the Malaysian O&G industry is sheltered from the global slide in crude because Petronas will keep up with its spending of about RM60bil per year.

Taking a jibe at the forecasters, Shamsul says he has been warning of a shake-up in the industry in all his quarterly briefings.

“But nobody wants to listen to me. The worst part is, some of them have been listening to these so-called desk-top analysts who say this cannot happen because Petronas is always there to help them out … dream on.”

Shamsul says it is also reviewing the feasibility of some of its projects and could shelve projects that are no longer viable and for which Petronas has yet to make its FID.

“For the last nine months, we have been telling you guys about the likelihood that oil prices will drop. So the declining oil price is no surprise to us,” says Shamsul.

“But like every international oil company (IOC) out there, declining oil prices will impact us, and as such, we have to review our capex plans for next year onwards, which is also what the IOCs are doing. We have to assess the feasibility of projects,” Shamsul says.

He adds that at current oil price levels, marginal oil fields are no longer feasible for Petronas to get involved in, and warns that companies seeking to get involved in this business are “dreaming”.

When asked what was his message to the service providers seeking to do more work for Petronas, Shamsul said: “I’ve been singing this song for the last nine months, to watch out because things are not going to be that rosy.

“But not many seem to want to listen to me. So, I’ve stopped singing that song. But when they (service providers) get hurt, they will know,” he said.

Clearly, Shamsul is referring to how the sluggish oil price will force it to become more cost-effective in its projects, cancelling some, shelving others and negotiating down the terms of others.

Impact to federal government coffers

Meanwhile, Shamsul also explains that based on the assumption that oil prices average US$75 per barrel for 2015, the state oil firm would be paying the Government about RM43bil in dividends, royalty and taxes.

This would be 37% less than the RM68bil it plans to pay the Government this year.

“The lower dividend and other payout contributions is to ensure Petronas has enough money to replenish the reserves. If we are to maintain the payouts, it will have a significant impact on our growth plans,” says Shamsul.

As such, he says the Government should relook and rebalance its budget planning to adjust to the new level of oil prices.

He also reiterates that Petronas still needs to keep investing in new technology, in overseas projects and increasing its oil reserves in order to maintain its growth, considering that current production levels decline by some 10% every year, naturally.

At present, Petronas produces some two million barrels of oil equivalent per day.

“In five years, if we don’t replenish our production, our production will be down to half of what we have today,” he asserts.

Oil
derricks like this one outside of Williston, North Dakota, are part of a
shale oil boom that has helped put the United States on track to
overtake Saudi Arabia as the world's leading oil producer. Photograph by
Gregory Bull, ...

The
US has benefited from large domestic production gains, particularly in
shale oil. This has been made possible by technological innovation in
oil drilling such as 'hydraulic fracturing' (or 'fracking') as well as
the opening of ...

But
the US shale bonanza has been more than three decades in the making,
and draws on the experience and infrastructure of a well-established oil
and gas industry. North America has thousands of kilometres of gas ...

Thursday, 27 November 2014

Malaysia's problem isn't Bahasa Malaysia but English, and it is incredible that so many of us have refused to acknowledge this or even want to address it.

THERE have been so many silly remarks and statements by some Malaysian politicians and one-man show non-governmental organisations that it is becoming impossible to keep track of their comedy acts.

There is a saying: “There are people who are only good at making the news but cannot make a difference to the wellbeing of society.”

Well, in Malaysia, there are certainly many of them.

Last week, Johor state assemblyman Datuk Dr Shahruddin Salleh suggested that students who fail to master the national language be stripped of their citizen­ship. Yes, revoke, lucut, tarik balik, batal!

The Barisan Nasional representative for Jorak alleged that many students were not able to master the language, and this was even prevalent among the Malays. He didn’t say how many. Like one, 10, 20, hundreds or thousands, but was quoted as saying “many”.

“Even my own neighbour, whose father and mother are Malays, but because their child goes to international school, the child is unable to converse in Malay,” he said, adding that students were now more interested in mastering English and do not take the learning of Malay seriously.

The situation was prevalent in the vernacular schools, he added, because the use of Mandarin and Tamil made the students weak in the Malay language, which was further compounded by the fact that many of the teachers there are also not well-versed in Malay.

We’d like to think that Dr Shahruddin has a sense of humour but, seriously, what does he really mean when he said students who do not master the Malay language should be stripped of their citizenship?

How does one define mastery at the school level? Is it by the grades they score at the public examinations, like the UPSR, PMR or SPM? We know that these are just examination grades. A student can score a distinction or even fail miserably, but that in itself does not reflect his language proficiency in the real world.

To take an extreme example, some foreign workers who are in the country for just a few months can speak like a Malay, but do you think they will be able to pass the BM paper at SPM level? Or that they should therefore be accorded citizenship because they have mastered our national language?

We are not sure if Dr Shahruddin is having a bad patch with his neighbours because I do not think that his neighbours, who would have read his remarks by now, would be amused.

The reality is that there are many Malay households where English is prominently used because of a variety of reasons.

The children of diplomats, for example, because they are schooled in international schools, will definitely be more comfortable in English.

What about the children of politicians, especially those who send their children for better education overseas and then make a lot of noise about our local education system?

The assemblyman may want to project his nationalistic credentials ahead of his party general assembly, and he has conveniently used his whip at English and, of course, vernacular schools, the current flavour of the month.

There are enough statistics to show that many of our students and teachers are struggling with English in schools, especially those in the rural areas. Just Google.

The Malaysian Employers Federation secretary Datuk Shamsudin Bardan reportedly said that a survey a few years ago among its members found that 60% of them identified low English proficiency as the main problem with young recruits.

A similar survey in September last year by online recruitment agency

JobStreet.com found that 55% of senior managers and companies considered poor command of the English language among graduates to be the main reason for their difficulty in finding employment.

Sabah Tourism, Environment and Culture Minister Datuk Masidi Manjun had said that 70% of Malaysian graduates are having a hard time finding jobs in the private sector due to poor command of English.

Citing his past work experience with a multinational company in peninsular Malaysia, Masidi said 70% of those interviewed did not make it through to the second round as they could not converse well in English.

Second Education Minister Datuk Seri Idris Jusoh had said that about two-thirds of English Language teachers in the country have been classified as “incapable” or “unfit” to teach the subject in schools. These teachers, he said, have been sent for courses to improve their proficiency in the language.

It has also been reported that about 70% of the 60,000 English Language teachers who sat for the English Language Cambridge Placement Test performed poorly.

Granted that there are students who fare badly in Bahasa Malaysia, but we do not think the numbers are big. Instead of making such a generalisation, we expect the Jorak assemblyman to back up his claim with more substantial findings and figures.

Neither has he been able to support this pathetic claim that “the use of Mandarin and Tamil by teachers in vernacular schools is another reason for students being weak in Malay, adding that the teachers are also not well-versed in Malay.”

Our real problem isn’t Bahasa Malaysia but English. It is incredible that so many of us have refused to acknowledge this problem or even want to address it, lacking the political will, unfortunately.

There is no point in deceiving ourselves by allowing our children to easily pass the English tests in schools and in public examinations.

There may be a huge number of students scoring distinctions in English at the SPM level but their real ability is revealed when they enter tertiary education and, later, the working world.

The MEF’s Shamsudin told a news portal in April that there are those with As and Bs in English at the SPM level who cannot even hold a conversation in English.

“Which is why we were excited when the government decided to teach Mathematics and Science in English (PPSMI), as we felt this could boost their command of English. Unfortunately, it was cancelled after seven years when we should have allowed it to continue for 14 to 15 years to see the results.

“The inability to converse and understand English (among young school-leavers) is a constant complaint among our members,” said Shamsudin. The MEF has 4,800 direct members and 21 affiliated trade associations.

In the end, it will be the rural students who will suffer the most. These are the very people that our elected representatives claim to represent and fight for their rights and interests.

Do we need to check how many of our Honourable Members are sending their children to private and international schools even as they wax eloquence about the importance of the national schools?

Actually, we should all be concerned about proficiency in English, an issue that has also been recently taken up by Tun Dr Mahathir Mohamad and Tengku Razaleigh Hamzah, who can see the value of the English language without undermining the stature of the national language.

As Dr Mahathir rightly pointed out, the rich go to private schools while the poor go to national schools at home, adding that “I must confess that although my children all went to national schools, my grandchildren all go to private schools in the country and abroad. They do speak the national language but their kind of schooling widens the gap between races as well as between the rich and the poor.”

Well, it looks like the only thing that we have fared consistently well in is the comic relief provided by some of our politicians. And we can be sure the curtains will never come down on these comedians as they continue to seek out non-issues to put themselves in the spotlight.

The views expressed are entirely the writer’s own.

By Wong Chun Wai on the beat focus

Wong Chun Wai began his career as a journalist in Penang, and has served The Star for over 27 years in various capacities and roles. He is now the group's managing director/chief executive officer and formerly the group chief editor.

On The Beat made its debut on Feb 23 1997 and Chun Wai has penned the column weekly without a break, except for the occasional press holiday when the paper was not published. In May 2011, a compilation of selected articles of On The Beat was published as a book and launched in conjunction with his 50th birthday. Chun Wai also comments on current issues in The Star.

Malaysian Chinese National-type Schools

DON’T bark up the wrong tree. That is the message many would like to convey to Deputy Minister in the Prime Minister’s Department Datuk Razali Ibrahim who has opposed the approval for building new Chinese national-type schools (SJKC).

The deputy minister was quoted as saying, “As long as approval is given, the relationship between the different races shall be further deteriorate, and shall be like throwing a spanner into the works of nurturing national harmony.”

This is clearly a statement made without having researched the functions of SJKCs in fostering mutual understanding between the races. For the record, Chinese national-type primary schools (SRJK) have more non-Chinese students than boarding schools and religious schools have non-Malay students.

There are at present approximately 80,000 Malay students in the so-called “unity-harming” SJKCs. Thus, I humbly ask Datuk Razali if the opinions of parents of these Malay students have been sought.

These parents appear to be sending their children to Chinese national-type schools not to “de-Malaysian-ise” them but to Malaysian-ise them.

In Malaysia, it common knowledge that most Malays are fluent in just two languages, namely English and Bahasa Malaysia while, most Chinese and Indians know at least three languages. Knowing one more language certainly gives children a cutting edge.

There is also, at present, growing pessimism over the way education in national schools is handled. Teaching science and mathematics in English which reverted to the teaching science and mathematics in Bahasa Malaysia as well as the ever-changing format of national level examinations are just a few areas of concern.

There is also the perception that certain races are favoured by the national school system. It is due to this perception that many, who want a level-playing field, choose the Chinese national-type school system.

Furthermore, perhaps China’s emergence as a world political and economic power has persuaded pragmatic Malay and Indian parents to try to get their children to learn Mandarin, the second most widely spoken language in the world after English.

How exactly do Chinese national-type schools affect national unity?

Children in Chinese schools still sing Negaraku. Bahasa Malaysia is still being taught there. There is no difference in syllabus taught in national schools. In fact, all children in Chinese schools are taught to love and respect Malaysia.

So Datuk Razali, I humbly ask just what are the problems which affect national unity?

SJKCs schools have been around for decades, so why is the question of unity being brought up?

In my opinion, educators who use words like “pendatang” and tell students to “balik Cina” and “balik India’ are the real threats racial harmony.

I believe that racial harmony has actually been disrupted due to political figures who’ve made use of race as propaganda to score political points and win votes. The exaggeration of petty issues and the manipulation of these issues via social media have made these politicians heroes in the eyes of supporters. However, what it has really done is instil hatred among the races.

If, and it’s a big if, Chinese national-type schools do contribute to disharmony, the better option would be for the Education Ministry to form a special taskforce, and conduct periodic audits of the schools and their syllabuses. That would be better than denying parents an option with regard where they wish to educate their children.

Wednesday, 26 November 2014

Geared up: A participants in the 1337 Accelerator programme demonstrating a gaming app, Agent RX — a single player top down stealth game. The app can be used on a desktop and be enhanced with the Oculus.

Over the course of grooming startups, the industry has perhaps grown familiar with the terms “incubator” and more recently, “accelerator”.

These organisations, part of the modern support system for new entrepreneurs, have helped startups take shape in their early stages.

In almost all cases, participation in an incubator or accelerator programme has enabled entrepreneurs gain access to resources beyond their own to scale their business. Services such as regulatory and strategic expertise that otherwise may not be available to independent startups become more readily available.

And because of their seemingly similar functions and involvement with early-stage startups, incubators and accelerators are often mistaken to mean the same thing. But they are not.

An incubator is essentially a physical work space that hosts a new business with many other startup companies. Startups are usually allowed to stay in the space as long as they need to and mentorship is typically provided by the incubator or through peers at the facility.

An accelerator programme, on the other hand, is limited to a three- to four-month period intended to accelerate a startups’ business and the kick them out of the nest. Accelerators often make investments in the companies they support and provide a strong network of mentorship. These programmes typically culminate in a “pitch day” for startups to raise more funds from venture capitals.

In Malaysia, both private and government funded incubators have been set up in the Klang Valley over the past few years as the government pushes for the growth of more local entrepreneurs and startups.

But it may come as a surprise to some that there is only one proper accelerator model in Malaysia, known as 1337 Accelerator.

1337, pronounced “leet”, started in March last year with an initial government funding of RM5mil to invest in startups. The programme has two intakes a year where budding tech-entrepreneurs are given the opportunity to join the programme to develop their ideas and take them to market.

“We invest in the best minds in the country. The teams here have to earn their way into the programme. They have to go through a stringent panel to see if they have an investor-worthy idea and can contribute back to the ecosystem,” said Bikesh Lakhmichand, chief executive officer of 1337 Ventures Sdn Bhd.

He explained that accelerators are more mentor-driven and are directly involved with the development of the startup.

According to Bikesh, accelerators are the way of the future for startups, noting that the trend is growing globally to create a more vibrant startup community.

However, incubators, too, have their appeal.

As incubators do not invest in startups, entrepreneurs are able to maintain full ownership and control of their companies while tapping onto facilities provided by the incubators.

Among incubators in Malaysia, many would probably be familiar with Technology Park Malaysia (TPM) and MAD Incubator.

TPM spans some 650 acres of land in Bukit Jalil with total lettable business and incubation space of 725,000sq ft.

Its president and chief executive officer Datuk Mohd Azman Shahidin said the number of companies at TPM has grown to more than 200.

Companies that have been selected for TPM’s incubation programme will be guided through a hand-holding and business coaching programme over a duration of six to 18 months. Here, they will be equipped with knowledge on product development, marketing techniques, R&D and networking.

“Our main role is to accelerate the growth of small businesses. We are here to grow and be the catalyst for these companies. And we have seen some companies here that have grown to become listed companies,” Azman said.

MAD Incubator has also seen good traction with its facilities and had launched its third incubator in Malaysia in the middle of the year.

While different in nature, both incubators and accelerators play an important role in boosting early-stage venture. One model may not necessarily be better than the other. But interested startups should be clear on what they want out of these supporters to get the best out of these facilitiesGovt incentives for startups - part 6

Silicon Valley has long been known as a hub for high-tech innovation. The southern part of the Bay Area is home to many of the world’s largest companies and thousands of startups including Facebook, Google and eBay.

But Silicon Valley was not an overnight success story. It took decades of government funding and support to make it the vibrant tech cluster it is today.

Policymakers play an important role in supporting the growth of a startup ecosystem. Be it in funding research and technologies or in building infrastructure, government help create ideal conditions for innovation and commercialisation.

In Malaysia, the government has announced various initiatives, including financial allocations, over the years to groom entrepreneurship and support the startup ecosystem.

In the Budget 2015 speech, the Prime Minister noted the government’s aspiration to position Malaysia as a choice location for startups in the region.

And among its efforts to achieve this target is the establishment of Malaysian Global Innovation & Creative Centre (MaGIC) to create a more conducive ecosystem for startups.

Financial assistance

One of the most crucial ingredients for the development of startups is funding and several government agencies have been established to dispense pre-seed and seed funding to enable startups to transform ideas into commercially viable products and ventures.

These agencies include not-for-profit organisation Cradle Fund Sdn Bhd and venture capital company Malaysia Venture Capital Management Bhd (MAVCAP), both under the purview of the Finance Ministry.

As a VC, Mavcap makes direct investments with fund size ranging from RM1mil to RM20mil and participates actively in the management and operations of these companies.

Mavcap also invests through its Outsource Partners Programmes, whereby it allocates capital to other VC fund management companies to invest in high-growth businesses.

Cradle offers a maximum seed funding of up to RM500,000 to help technology companies attain commercialisation.

Tax incentives

The government has also introduced tax breaks to encourage private investments in startups as well as promote the setting up of high-tech companies in Malaysia.

For example, the Angel Tax Incentive allows angel investors who have invested in early-stage startups to qualify for tax exemption. This would indirectly see more fund flows to startups and also encourage eligible angels to participate in the ecosystem.

There are incentives for ventures that have obtained MSC Status including a 100% investment tax allowance and duty-free importation of multimedia equipment.

Building skills

Various programmes have also been initiated to build entrepreneurial and technical skills as well as encourage interest among the local community to venture into the startup scene.

MaGIC recently launched its partnership with Stanford University, which, among its programmes, would send entrepreneurs to Silicon Valley for a two-week immersion programme.

The partnership will also see an exchange programme whereby local entrepreneurs will be able to learn from the Stamford faculty on marketing and commercialising their ideas.

Another significant component of the partnership is the “Faculty Train Faculty” Programme where faculty members from 14 local universities will be sent to Stanford over the next three years to help them develop impactful and creative entrepreneurship programs in their respective universities.

Early this year, MDeC announced its MSC Malaysia Startup Accelerator Lite programme to help early-stage ICT startups map out and accelerate their goals.

MDeC is also working with partners such as JFDI Asia, a regional startup accelerator, to help mature and globalise the local startup community.

Government agencies are actively seeking partnerships with startup communities and small and medium companies in other countries to provide local startups with an opportunity to learn from and potentially partner with startups abroad as well as explore other markets.

BEYOND just starting a business, a startup company’s main purpose for being is to offer a product or innovation that addresses a problem.

As one investor puts it, a truly innovative product will solve a customer’s problem that has not been solved before.

But one of the challenges of introducing a new product or innovation is that it has not been tried or tested. Naturally, the market may be slow in embracing such an innovation.

Additionally, startups rarely have the capacity or network to tap into new markets to bring their products out.

As such, investing partners, with their strong networks and deep pockets, play an important role in the startup ecosystem by providing the kind of market access needed by startups to reach potential customers.

Corporations, investors and even the government are increasingly recognising this need and are providing platforms for startups to tap into, beyond just early and growth-stage funding.

For example, early last year, Telekom Malaysia, the Multimedia Development Corporation and StartupMalaysia.org collaborated on an accelerator programme focusing on getting startups to market quickly.

More recently, telco giant Axiata Group Bhd and Malaysia Venture Capital Management Bhd (Mavcap) recently signed an agreement to establish a RM100mil venture capital fund, the Axiata Digital Innovation Fund (ADIF), to help companies with innovative products in the digital-services space markettheir offerings.

ADIF will focus on revenue-generating companies that may still require support to grow in terms of funding, know-how and market access.

Axiata noted that digital-services entrepreneurs will have unprecedented access to regional partnership opportunities among other things, thanks to its extensive market reach of over 13 million customers in Malaysia and over 250 million across Asia.

Given Axiata’s many years of operations in the region, these startups are also able to leverage the telco’s in-depth knowledge of the regional market.

Likewise, Alliance Bank’s SME Innovation Challenge 2014 programme provides participating startups with an opportunity to be coached by corporate titans, a platform to network through, and access to markets.

When new products are launched, startups and their investors concentrate the bulk of their initial efforts on educating the market about what the products offer.

But entrepreneurs understand that having an innovation with little visibility and access to markets does no good.

Startups are now seeing the need for opportunities to tap into existing networks and markets, coaching, exposure and resources, offered by incubation and accelerator programmes.

In other markets where the startup ecosystems are more mature, the private sector and governments have introduced programmes to tackle market-access issues for startups.

These include the US Market Validation Program run by Silicon Valley-based tech accelerator, US Market Access Center, and the Market Access Grant administered by the Irish government to incentivise companies to develop viable and sustainable market entry strategies for new products and markets.

While such efforts have yet to become well established here, different players in the local ecosystem are becoming more aware of the need to provide startups with market access to ensure better chances of success.

By Joy Lee The Star/Asia News Network

■ This is the seventh instalment of MetroBiz’s tie-up with Malaysian Global Innovation and Creativity Centre (MaGIC) to explore startup ecosystems.

Tuesday, 25 November 2014

I RECENTLY moved into our new house in Sungai Ramal Dalam. I bought the property back in 2012 and we received the vacant possession in January this year.

The journey towards moving into this property has not been a smooth one and I thought I should share some of the lessons.

When I first visited the site in 2012, only the show house was available for viewing. All the other units were blocked off because they were still under construction.

So the purchase was under the “sell-then-build” scheme. The developer sells a property that is not yet built, and the buyer pays for something depicted by the show unit, but in reality you don’t really know what you will get. The developer advertised it as a gated and guarded community of just 26 houses, and the show unit was quite decent.

We liked the concept and decided to go ahead anyway, despite a friend expressing doubts about the reliability of the developer because they are just a small company.

Skip forward to January this year: a letter arrived saying that the time had come for me to take the keys, or in jargon-speak, to take over the vacant possession. When I went to the developer’s office in Hulu Kelang, I was told to sign a letter confirming that I agreed to accept the property.

They also told me that the Certificate of Completion and Compliance (formerly called the CF) should be ready within two weeks and I should not do any renovation or move in before receiving it.

It was soon after this that problems started to occur. When I inspected the property more thoroughly, I discovered that the property was not yet satisfactorily completed.

Taps and doorknobs were missing. Some tiles were not properly fitted. The window frames were of different shades. Electrical sockets were not installed. The back garden slopes with a gradient that renders the area more or less unusable.

And the developer has not even applied for permission to build a gated and guarded community, despite advertising it in their sales brochure.

To make matters worse, the CCC did not arrive within the promised two weeks. I only received it last June. Throughout all this, I sent notice after notice to the developer asking them to rectify the defects.

They were extremely slow to respond. It was only then that I realised I should not have accepted the vacant possession without the CCC.

I then found the National House Buyers Association, and met with their secretary-general Chang Kim Loong who happens to be a fellow columnist in this newspaper. I learnt a tremendous amount from him and let me share some of the lessons here. If you are planning to buy a property and you don’t want to face the problems that I am having now, I suggest you read on.

Firstly when you buy a property, you should get the Sale and Purchase Agreement (S&P) checked by someone with proper knowledge, or appoint your own lawyer.

The two lawyers you deal with at the early stages represent your bank and the developer. They don’t represent you and they don’t have your interest at heart. You need your own lawyer.

Secondly, read the S&P yourself, carefully. With the benefit of hindsight, I am amazed at how I simply signed on the dotted line without reading the papers carefully first.

The document contains important information about your rights. And you should read it in greater detail if the developer says to you that the S&P is “just a formality”.

Thirdly, learn your rights as well as the procedures in the purchase.

If only I had taken some time to learn the ropes, I would have known that I should be extremely worried if a developer hands over vacant possession without a CCC (and promises you he will get it done within two weeks). Even more so when they start saying things like “we are all Malays and we should help each other”. Fourth, the sell-then-build scheme benefits mainly the developers and not necessarily the consumers. You are being asked to pay for something that is not even built yet and you never really know what you will eventually get. If the developer is rogue, then what you pay for is not necessarily what you will get.

In my case, the show unit has a concrete wall in the backyard, but my unit has just wire fencing. When I asked the developer, he responded that the S&P does not compel him to build a unit that is exactly the same as the show unit. Since it was a sell-then-build scheme, there is not much that I can do.

Recently Urban Wellbeing, Hou­sing and Local Government Minister Datuk Abdul Rahman Dahlan an­­­nounced that he wants to allow developers to choose between sell-then-build and build-then-sell. He is effectively doing a U-turn because the previous minister wanted to make build-then-sell compulsory.

Of course, developers love the sell-then-build scheme because they get the cash in advance. Risks are transferred to buyers.

Fifth, despite the U-turn policy, the Housing Ministry is actually quite effective in dealing with consumer complaints. I have had a very good experience in dealing with the National Housing Department and the Tribunal for Homebuyer’s Claims (TTPR). The processes to submit a claim through the TTPR are simple enough to understand even for a layperson like me. The TTPR is also very transparent.

My case hearing was conducted in public and if you go to the tribunal’s website, you can find information about the claim that I filed. This transparency allows everyone to learn from the experience of others.

Let me end by saying that buying a house is probably the most expensive purchase you will ever make. You really should learn your rights.

If you find yourself dealing with a situation like I am in now, then you must not let the developer off the hook. Get advice from the brilliant team at the National House Buyers’ Association. Take the developer to the TTPR. And report them to the National Housing Department.

You should not despair because there are mechanisms to help protect you, including those instituted by the Government, as long as you are willing to take the initiative.

Think Liberally by Wan Saiful Wan Jan

Wan Saiful Wan Jan is chief executive of the Institute for Democracy and Economic Affairs (www.ideas.org.my). The views expressed here are entirely the writer’s own.

Monday, 24 November 2014

LOTS of people shy away from financial planning because they think they may be pressured into investing. And when you think investing, what comes to mind are horror stories of people who lost their life savings during the Asian financial crisis and Dot Com Bubble.

We hear tales of greed and chasing the hottest sexiest investment themes that has led them down the path of poverty and for some great debt due to leverage.

Admittedly, in the wealth management business, investments do form a large part of conversations that happen between ourselves and our clients.

For the most part, people speak to financial planners or wealth managers about how to make their money grow faster so they can meet their goals.

How much return can I get?
What can I get if I invest in equities?
How about properties?
How can I start investing in currencies?

When people engage in a conversation about investments, inevitably, we get seduced by the quest to find the highest yielding asset. We steer into instruments we are not familiar with, drawn by the allure of high headline returns.

Think dotcoms. Think gold investments. Think land investments. Think bitcoin. Not necessarily bad investments but the basic concept of risk and diversification fall by the wayside as we chase returns.

But, step back for a moment.

Are you asking the right question?
Is financial planning only about finding the next best investment?

While investing will likely play a key role in your financial plan, there are a lot more questions that need to be answered before you can choose the right investment, or if you even need to invest aggressively.

First question, how much do you need?
Second question, when will you need it?
Third question, how much have you set aside or are prepared to set aside?
Last question, what returns are you going to get?

So say, I would like to buy a property in five years, of which I plan to make a downpayment of RM50,000. I have currently set aside RM10,000. I can currently save RM500 monthly.

Let’s assume I have no experience investing and decide to place it in fixed deposit at 3% per annum. Doing my maths, after five years, with interest compounded, all this adds up to only RM43,000. You are RM7,000 short.

In such an example, most people approach an adviser to find out what could yield them higher returns. In the above example, any misadventures in your investments could possibly set you back in your acquisition of your next property.

What if this was your children’s education? You may not want to risk your child entering university two years late. These are things your adviser needs to know as there other alternatives.

Financial management is very much about balancing between these four requirements. While getting higher returns so you can meet your goal is one way, it’s not the only way! You have other options. So, let’s go back to the four questions.

Firstly, you could buy a cheaper property with RM43,000.
Alternatively, you could wait another year to purchase that property, giving you more time to save up.
Or, you could increase your monthly savings to RM600 at 3% per annum.
Lastly, consider investing in something that yields you 7% per annum.
So, really, out of four options, only one is about investing.

For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed.

By Ong Shi Jie

For the most part, investing plays quite an essential role in most people’s portfolio. However, before you even have that discussion, think about the goals you want to achieve and whether investing is required and what kind of investment performance is needed, says Ong.

Sunday, 23 November 2014

The success story of regional integration in Latin America today is seldom heard elsewhere in the world, even as people there experience it daily.

LATIN America has been experiencing a progressive, historic but silent revolution for 10 years now. However, few people in the rest of the world seem aware of it.

The silence is not because these countries had sought to avoid world attention. Rather, the international media dominated by Western news agencies seem to have other priorities.

Often enough significant events and key issues are neglected, bypassed by the saucy, the sensational and the scandalous – all that glitters is not gold, much that matters may never be told.
Without exception, Western news agencies have doggedly promoted the so-called Arab Spring to the point of tedium.

The standard bogeymen of Western storytelling – Saddam Hussein, Muammar Gaddafi, Bashar Assad – are going or gone, so jubilation in Occidental newsrooms may be expected. But there should be limits and other (news) priorities too.

Elsewhere, countries that succeed outside Western norms, dictates and development models may seem unimportant or “politically incorrect”. So they are routinely ignored or underrated.

Worse, the changes said to be wrought by “Arab Spring” uprisings are said to be positive when the exact opposite is happening.

In virtually all these countries, living conditions have deteriorated rather than improved.

But the nine countries of Latin America and the Caribbean that came together in 2004 as the Bolivarian Alliance for the Peoples of Our America (Alba) have been making great strides in every critical area of national development.

Antigua and Barbuda, Bolivia, Cuba, Dominica, Ecuador, Nicaragua, Saint Lucia, Saint Vincent and the Grenadines, and Venezuela have raised standards of living for their people in social, economic and political terms.

Standards in housing, health care, education and employment have risen. These countries have also scored a high 0.721 in the UN Human Development Index, which measures national achievements beyond economic growth and material development.

On Dec 14, 2004, Venezuela and Cuba signed the joint declaration for the establishment of Alba. The alliance is based on humanist principles that place the citizen rather than the state or the corporation at the centre of national policymaking.

This people-centred alliance soon attracted the interest of other countries. Next to join were Bolivia, then Nicaragua, and Dominica, with Ecuador, Antigua and Barbuda as well as St Vincent and the Grenadines joining together – followed by St Lucia.

Grenada and St Kitts and Nevis will be the next members. Other countries attending Alba summits as Participants are Guatemala, Haiti, Honduras, Paraguay, St Kitts and Nevis, and Uruguay.

With a proud record of a decade’s achievements under its belt, Alba marked the passage of its first decade at a forum in Kuala Lumpur on Thursday.

Ambassador Lourdes Puma Puma of Ecuador explained Alba’s background and objectives, including the use of the Sucre (Unified System for Regional Compensation) as a virtual currency in trade among member nations.

There is also a Bank of Alba with regional integration as its core purpose. The bank encourages and offers financial support for projects that promote the social development of all the peoples of the continent regardless of race, religion, politics or other background.

The areas that Alba covers in promoting regional integration are comprehensive and ambitious. There are medical schools and a health sciences university with scholarships, and a pharmaceutical company and a drugs regulatory centre with free access to medication.

There are plans for a new financial architecture and an emphasis on science and technology, without neglecting the arts.

There are also awards and scholarships for literature, culture, research and cinematography.

Alba is also working with the People’s Trade Agreement that lobbies for the social, cultural and environmental rights of the region’s peoples. It also works with Petrocaribe, an alliance of nations over oil purchases, as well as Mercosur, a regional customs union for advancing free trade and the movement of goods, people and currency.

The guest speaker at the Kuala Lumpur forum was Dr Chandra Muzaffar, president of the Interna­tional Movement for a Just World.

Dr Chandra identified the significant distinction between Alba and other regional organisations in the way it places priority on the human being, the individual person, in public policymaking.

This humanist aspect of a caring regional society that Alba seeks to build is widely cherished by the national leaders of its member countries. And despite a priority on economic development, Alba is also conscious of environmental needs and emphasises sustainable development.

In pursuing technology, Alba also seeks independence of telecommunications content in programming. Telecoms and broadcasting community services will also be provided to rural and other marginal areas.

Despite their achievements, Alba countries are still developing nations with much to do to achieve full development status. In the meantime basic needs have not been forgotten, with a food fund that has cut malnourishment to under 5% in four Alba countries and eliminated illiteracy in five countries.

More broadly, Alba seeks a more multipolar world that avoids war as a matter of policy. It much prefers human development that addresses the real needs of real people, particularly the most disadvantaged members of society.

Alba is named after the great 18th-19th century Venezuelan leader and liberator Simon Bolivar, hailed as a Latin American independence hero and a regional beacon of progress and development.

Bolivar is the only person in history to have two countries named after him: Bolivia, and the Bolivarian Republic of Venezuela.

Bolivar’s goals for Venezuela and its neighbouring countries labouring under the Spanish colonial yoke may be summed up in four basic priorities: a popular and participatory democracy for the people, economic independence for real development, fairer wealth distribution and elimination of corruption.

In the Latin America of his time, Bolivar led territories that included Bolivia, Colombia (then including Panama), Ecuador, Peru and Venezuela. As a political and military leader he fought many private and public battles against slavery and for the liberation of his people.

Bolivar died in 1830 at the age of 47. He had paved the way for democracy in many countries in Latin America, but much else remains to be done.

After an era of cruel dictatorships, Latin America is again ready to embrace its history of decency and human achievement. But obstacles remain in the way of Alba countries, particularly when they seek their own way to development.

They prefer a more direct way that impacts positively on the people, particularly the most vulnerable in society such as the poor and the weak. Thus they avoid the customary assistance from powerful transnational institutions that comes with strings, cables and levers attached.

And yet when the UN established the Bretton Woods aid organisations the World Bank and the IMF, they were also supposed to help the poorest without encumbering them. But a problem with institutions is that their practices become institutionalised and worse.

Alba has been established with much goodwill and its achievements have been impressive.

Alba countries deserve support and admiration for their record so far, and encouragement on their promise.

Alba emerged from Venezuela’s rejection of the proposed Free Trade Area for the Americas, which would heighten inequality by enhancing the power of transnational corporations at the expense of the poor.

Neither the World Bank nor the IMF may want to call Alba’s achievements a “miracle”, but they are miraculous nonetheless.

Saturday, 22 November 2014

Malaysia's iconic Twin Towers are seen in the background of the Malaysian oil and gas company Petronas logo at a petrol station in Kuala Lumpur

DESPITE the geopolitical uncertainties in recent months – Islamic State of Iraq terrorism, Russian-Ukraine tension,Israel-Gaza conflict – Brent crude oil price has fallen to a new four-year low on Nov 13 at US$77.9 per barrel.

This is a significant drop from the average price of US$112 per barrel in June 2014. The floor price support is still not yet in sight and the downward spiral of prices seems likely to persist into 2015.

The key factors contributing to the recent drop in prices are large crude oil supply from American shale oil production, weakening demand from a subdued global economic growth outlook and also a stronger US dollar in the recent months.

Malaysia’s economy is very much dependent on the oil and gas sector. From the federal government budget revenue to the country’s exports of crude oil and petroleum products, the issue of falling crude oil prices warrants a closer inspection.

Government estimates gone awry

The Government’s projection of its fiscal position and overall economy in Budget 2015 is based on the assumption that the average Brent crude oil price would be US$105 per barrel in 2014 and US$100 per barrel in 2015. Given the substantial differences from the current market prices, the Government’s projections may no longer be in sync with the economic reality.

Budget net loss from oil prices downtrend

One notable impact of falling crude oil prices is on the government’s budget finances. On one hand, the oil and gas sector has been contributing a third to the government’s budget revenue since 2005. At the same time, the Government spends a substantial amount of its operating expenditure on fuel subsidies – an estimated of 8.5% of budget operating expenditure in 2014. Therefore, sliding crude oil prices is a double-edge sword to the country’s fiscal health.

To put the issue in perspective, the estimated budget revenue contribution from the oil and gas sector is around 6% of gross domestic product (GDP)in recent years while fuel subsidy costs the government around 1.7% of GDP in 2014. As such, the impact of lower budget revenue will outweigh expenditure savings from lower fuel subsidy cost.

Therefore, if the current blanket fuel subsidy mechanism is left status quo in light of falling crude oil prices, the circumstances would risk our nation’s fiscal deficit targets. Keep in mind that the government has committed to reduce the current fiscal deficit to GDP estimate of 3.5% in 2014 to 3% in 2015 and ultimately achieve a balanced budget by 2020.

Timely goods and services tax

No doubt the heavy dependency on the volatile oil and gas sector for budget revenue is beginning to show signs of cracks. The issue is even more pressing now that budget revenue is squeezed from falling crude oil prices.

Therefore, the broad-based goods and services tax (GST), which will enhance tax revenue collection, is considered timely at this juncture. However, the implementation of GST is only part of the long term solution to fiscal sustainability. The government must also look into the expenditure side of the budget finance to manage its fiscal prudence.

New subsidy mechanism or market prices?

Based on the current crude oil prices, the government is only subsidising RM0.13 per litre for RON95 and RM0.12 per litre for diesel in November, compared to RM0.47 per litre subsidy for RON95 and RM0.59 per litre subsidy for diesel in September – before the October RM0.20 per litre fuel price hike.

According to the Finance Ministry, if global crude oil prices fall to a low of between US$70 and US$75 per barrel, the Government would not be providing any subsidy for fuel at the current fixed price of RM2.30 per litre for RON95 and RM2.20 per litre for diesel.

Since the market pump prices are approaching a level that would require no subsidy at all, there is an urgent concern to review the sustainability of the current blanket fuel subsidy approach.Although the government has proposed to initiate a new targeted fuel subsidy rationalisation programme based on individual income thresholds, the circumstances demand a review of subsidy provisions.

Ultimately, fuel subsidy is not sustainable in the long run. Whether the government initiates a tiered fuel subsidy provision or not, the reality is that fuel subsidy should not be entrenched indefinitely.

To plan ahead for fiscal prudence, the government’s initiative to move towards a managed float pump prices is appropriate at this juncture.

When global crude oil prices are depressed, consumers would certainly rejoice. However, when there is a reversal of crude oil prices, the government could then step in to provide targeted assistance to the low-income households. As the government would be sensitive to the impact of rising cost to the low-income group, savings from fuel subsidy expenditure could be channelled to the targeted needy households.

The Bantuan Rakyat 1Malaysia (BR1M) provisions for eligible households and single individuals amount to around RM4.9bil in 2015, benefitting around 7 million recipients. Therefore, the low-income group has already been identified through the BR1M database. The government can consider to top up on BR1M with a supplementary monetary provisions equivalent to a cost of living allowance to compensate for the upside volatility of market fuel prices.

If the government would consider providing an additional RM250 to its BR1M provision for each eligible households and single individuals as the supplementary allowance, total BR1M payment for eligible recipients in 2015 would amount to around RM6.7bil.

Therefore, from the perspective of fiscal management, doing away with fuel subsidies would greatly assist the government to meet its fiscal objectives. From Budget 2015, the Government has allocated around RM37.7bil for subsidy expenditures. Based on historical trend, around 55% of total subsidy allocated is for fuel subsidies.

If the government considers abolishing subsidies for fuel in 2015, it could save up to RM20.7bil from the operating expenditure. Given that the projected fiscal deficit is around RM35.7bil for 2015, the savings from fuel subsidy will assist the government to meet its fiscal deficit targets. Furthermore, the government can also save billions of ringgit for money not spent on upgrading petrol pumps to accommodate the proposed tiered fuel subsidy mechanism.

As long as the provision for the additional supplementary allowance to BR1M does not exceed the savings from fuel subsidy expenditure, subsidies would be channelled to the targeted group while narrowing the fiscal deficit along the way.The cost of living allowance can be claimed through the BR1M distribution channel. This will assist the government to meet its fiscal deficit to GDP targets.

One way or another, it is still monetary subsidy provisions by the government. However, a more targeted approach to distributing provisions and also doing away with the heavy dependency on subsidies are the right approach moving forward not only for the fiscal health but also to the fundamental competitiveness of the economy.

By Manokaran Mottain, chief economist at Alliance Bank Malaysia Bhd.

Ringgit Falls for Sixth Week in Longest Stretch This Year on Oil

Malaysia’s ringgit fell for a sixth
week, the longest losing streak this year, as a slump in crude
oil prices threatens to crimp government revenue in a nation
that’s a net exporter of the fuel.

The ringgit is Southeast Asia’s worst-performing currency
in the second half as Brent crude lost 29 percent since the end
of June. Oil-related industries account for 30 percent of
government revenue. While a weaker exchange rate helps lower
export prices it makes imports more expensive. A report today
showed inflation quickened to 2.8 percent in October from a year
earlier, compared with 2.6 percent the previous month.

“The drop in commodity prices, especially crude oil, is to
be blamed for the ringgit weakness,” said Wong Chee Seng, a
foreign-exchange strategist at AmBank Group in Kuala Lumpur.
“The fact that the ringgit is a high-beta currency also didn’t
help,” he said, referring to a measure of volatility.

The ringgit depreciated 0.3 percent from Nov. 14 to 3.3555
per dollar in Kuala Lumpur, according to data compiled by
Bloomberg. It touched 3.3681 yesterday, the weakest level since
March 2010, and has lost 4.3 percent since June 30.

One-month implied volatility, a measure of expected moves
in the exchange rate used to price options and a gauge of risk,
increased 16 basis points, or 0.16 percentage point, to 7.15
percent this week.

Subsidy Announcement

The ringgit led gains among Asian currencies today, rising
0.3 percent, after the government said in a statement that it
will remove subsidies for fuel and diesel from Dec. 1 and as
Brent rebounded.

“The ringgit strengthened today because of the increase in
crude oil prices,” said Saktiandi Supaat, the Singapore-based
head of foreign-exchange research at Malayan Banking Bhd. “The
announcement on the subsidy removal gave further support.”

Malaysia’s 10-year government notes fell for a second week.
The yield on the 4.181 percent securities maturing in July 2024
rose three basis points to 3.9 percent, data compiled by
Bloomberg show. The yield dropped three basis points today. - Bloomberg